What Is Credit Mix?

Introduction

Credit scores are three-digit numbers that follow you through your financial life. You have multiple credit scores calculated with various scoring models from FICO and VantageScore, and each score is based on information that shows up in different versions of your credit report.

First you have lenders and creditors reporting information about your credit history to one or more of the three major credit bureaus — Experian, Equifax and TransUnion. The bureaus use that info to compile their unique credit reports. FICO and VantageScore extract the data in those reports to create your credit scores. Then other lenders use their chosen versions of your credit score to make their lending decisions, bringing it all full circle. Since so many aspects are involved, your credit score(s) can go up or down at any given time.  

But even with all these variables, credit mix plays a role in each version of your credit score. That means having different types of credit in your credit profile — which can help your score go up.

Generally speaking, having a higher credit score means you qualify for higher credit lines, lower interest rates, and better terms overall. So, it’s worth exploring the impact of credit mix.

Various Types of Credit

Credit comes in three major types: revolving, installment, and open credit. They don’t all affect your credit score to the same degree, but all of them could have some impact.

• Revolving credit gives you a credit line that you can use repeatedly after you pay it down. It’s like a starfish or salamander regenerating itself, as long as you feed and care for it properly. This includes credit cards and lines of credit, including home equity lines of credit (HELOCs). 
• Installment credit gives you a specific amount up front that you pay off over a set period of time, with fixed payments due at predetermined intervals. It’s like a child that you nurture and raise to adulthood — and when those years have passed, your job is done. This includes car loans, student loans, personal loans and mortgages. 
• Open credit lets you use a service with the expectation that you’ll pay for the privilege. It’s like water flowing from a tap. You use it as needed, and pay for what you use with no fixed limit — as long as you make the full payment each month. This includes utilities like your gas, electricity, trash services, water supply, TV, internet and phone bills. Some issuers treat charge cards as open credit too.

There’s a good chance you’ll have all three types of credit at some point in your adult life. However, when it comes to your credit score, it’s the first two that really matter the most. Unless it’s a charge card, open credit doesn’t usually affect your score in a positive way, because utility bills are typically not reported to the credit bureaus — unless you stop paying them.

A noteworthy exception is when you use a free service like Experian Boost, which reports your on-time utility bill and insurance payments. Well, at least it reports to one of the credit bureaus, which is better than none. Spoiler alert: it’s Experian.

But in most cases, revolving and installment credit are the types that get considered in your credit mix, which is part of your credit score calculation. So, let’s take a closer look at those two.

The Difference Between Revolving and Installment Credit

Even though you could have different types of revolving credit and installment credit, it’s best to keep it simple by looking at the most common possibilities. Credit cards are revolving credit and loans are installment credit — which is why you sometimes hear them described as installment loans. So, the ideal scenario is to have a few credit cards and at least one loan on file.

Many people start out with revolving credit first. Creditors send out pre-approved credit card offers to young people at the beginning of their credit journey so they can establish brand loyalty early on. If you previously have no credit history, student cards or secured cards are the most likely offers.

If you start with installment credit, it’s typically going to be a student loan or credit-building loan. An auto loan is possible, but car credit scoring is complicated and usually relies on having an established credit history first.

The following table illustrates how the two types of credit compare, along with their pros and cons.

Both revolving credit and installment credit typically come with more favorable terms when you have a higher credit score.

How Credit Mix Impacts Your Credit Score

Lenders want to see that you can handle a variety of different credit types, including credit cards and loans. So, credit mix is important to them in the grand scheme of things, and the credit score companies use it as part of their calculation criteria.

FICO and VantageScore both consider credit mix in their credit scoring models, but not to exactly the same degree.

Your FICO Score weighs “mix of credit accounts” at 10% of the total score. However, “new credit” is worth another 10%, and that’s a negative impact rather than positive. So even though you want a nice mix of credit types, it’s not a good idea to start applying for loans just to diversify your credit mix. And don’t forget about the hard inquiry on your credit report every time you apply for a new account, which can also lower your score a bit.

VantageScore doesn’t specifically call out credit mix, but weighs “length and types of credit” at 20% of your score. So that includes both your credit history and credit mix in one.

You might be thinking that 10% isn’t very much, but when you simplify all this, you’ll see that your credit score mainly relies on three basic parts. Payment history is worth approximately one third, credit utilization is worth another third, and your credit history — including both length and credit mix — makes up the final third. And that structure holds true regardless of the scoring model.

Bottom Line

Credit mix might not be the biggest factor impacting your credit score, but it’s still an important consideration. When you prove your ability to manage both revolving and installment credit, lenders look at you in a more favorable light.

However, you probably don’t want to go full force on diversifying your credit mix by applying for a bunch of new cards and loans. This can make you look desperate for credit, and ding your credit score through too many hard pulls. In the end, the downside usually outweighs any potential upside — so when it comes to credit mix, slow and steady wins the race.